A recent Supreme Court decision may prompt patent holders to review license agreements and build in extra protections against actions filed by their licensees. In the case, Medtronic Inv. v. Mirowski Family Ventures, the Court held that a patent holder has the burden of proving infringement in a declaratory judgment action brought by a licensee.
The case was based on an arrangement in which Mirowski Family Ventures held several patents relating to implantable heart stimulators. Medtronic was party to a license agreement with Mirowski, as Medtronic was successor in interest to the original licensee (Eli Lilly). The agreement gave Medtronic a license to produce certain products under the patents in exchange for royalty payments. The agreement also included a procedure for bringing new products under the license. Specifically, if Mirowski notified Medtronic that a new product was infringing any of the patents, Medtronic could either cure the infringement by paying royalties or challenge the infringement by filing a declaratory judgment action.
The dispute arose when Mirowski notified Medtronic that seven new products infringed the Mirowski patents. Medtronic disagreed and brought an action for declaratory judgment of non-infringement. Ordinarily, in any patent infringement dispute, the patent holder bears the burden of proof of infringement. However, the lower court (the Federal Circuit) held that where the dispute is one between a licensor and licensee, the burden of persuasion shifts to the licensee (to prove non-infringement) if the licensee brings a declaratory judgment action.
In its opinion of the appeal from the Federal Circuit decision, the Supreme Court provided a very concise summary of the question and its conclusion:
We now turn to the question presented. A patent licensee paying royalties into an escrow account under a patent licensing agreement seeks a declaratory judgment that some of its products are not covered by or do not infringe the patent, and that it therefore does not owe royalties for those products. In that suit, who bears the burden of proof, or, to be more precise, the burden of persuasion? Must the patentee prove infringement or must the licensee prove noninfringement? In our view, the burden of persuasion is with the patentee, just as it would be had the patentee brought an infringement suit.
Thus, in a unanimous opinion, the Court reversed the decision of the Federal Circuit.
An implication of the decision is that patent licensors should be cautious when accusing licensees of patent infringement, whether the accusation is based on non-payment of royalties or on the sale of non-licensed products. Accusations of infringement could result in a declaratory judgment action by the licensee. If the declaratory judgment action involves only the patents and not the license agreement, the licensee may be able to select the venue for the declaratory judgment action.
Because of this, patent holders may wish to consider certain changes to their typical license agreements. For example, if a choice of venue clause refers only to disputes under the agreement, disputes regarding unlicensed products could be considered to fall outside of the agreement. So, a patent holder may consider bringing any disputes relating to the licensed patents into the choice of venue clause. This could limit the locations in which the licensee can bring a declaratory judgment action, and perhaps make it more inconvenient for the licensee to do so.
However, the extent to which a patent holder can place other limits on declaratory judgment actions is not as clear. For example, the licensor could include a clause that permits termination of the license agreement if the licensee brings a declaratory judgment action. Whether such a clause will be upheld on public policy grounds has been questioned by a number of commentators after cases such as MedImmune v. Genentech. Until such clauses are definitively upheld or struck down many patent holders are including such clauses to provide an extra degree of protection in licensing arrangements.